– KPMG calls for banks to take early proactive action to address capital needs likely to arise from Comprehensive Assessment and not wait until the results are published in late October
– Dealing with the results of the Asset Quality Review now will reduce the potential risk and pressure from Brisbane G20 summit in November
– Unique opportunity to present a strategy for long-term profitability underpinned by ECB’s “seal of approval” on bank balance sheets
Ahead of the European Central Bank (ECB) taking charge of the prudential banking supervision of the Eurozone’s largest banks in November, KPMG is calling for banks to pre-empt the potential direction of the ECB’s Comprehensive Assessment, and not wait until the end of October to take action.
In what can be considered the biggest ever buy-side due diligence exercise, the ECB is due to publish the results of its Comprehensive Assessment in late October, comprising of a Supervisor Risk Assessment, Stress Test and Asset Quality Review (AQR). The ECB has indicated that banks will have between six and nine months to address any capital shortfall after the aggregate results are made public at the end of October.
However, KPMG believes that the publication of the ECB’s AQR and Stress Test methodologies, combined with information disclosed by the National Competent Authority (NCA) and Auditor, will already be sufficient for banks to infer the potential level of impact the assessment will have on capital and the subsequent actions required.
KPMG is advising banks, whose management believe that they might fail the assessment, to take advantage of the current favourable capital markets that have already enabled banks to raise €45billion of Common Equity Tier One Capital between July 2013 and May 2014. Banks expecting a borderline pass are advised to consider a more subtle change of capital, asset mix and leverage.
Stephen Smith, co-head of KPMG’s AQR taskforce explained: “Fundamentally banks should now have enough information to act upon from the Comprehensive Assessment exercise. Pre-emptive action will demonstrate the banks’ strength, rather than waiting and being told what to do. Any delay creates exposure to deterioration in current favourable capital market conditions.
“The ECB and NCAs have been keen to ensure that the key inputs to the final analysis of the assessment are correct. To this end, many NCAs have disclosed the key issues to banks and therefore most banks are already in the position to make strategic decisions.
“In advance of the Brisbane G20 summit, we anticipate more questions arising on financial stability in. Large European banks do not want to face the double threat of calls for further capital from the G20 communiqué, along with the results of the AQR and stress test being published at about the same time. Dealing with the results of the AQR now will reduce this risk and demonstrate that the European banks are well placed in comparison to their international counterparts.”
KPMG is also advising banks to use the opportunity to take advantage of the reassurance provided by the Comprehensive Assessment.
Francisco Uria Fernandez, co–head of KPMG’s AQR taskforce, added: “Investor perceptions of the European banking sector have been dominated by unresolved concerns on the quality of bank balance sheets. The ECB’s implicit ‘seal of approval’ should lay these concerns to rest. However, profitability remains an industry wide issue.
“The Comprehensive Assessment draws a line under the long standing market concerns on the quality of the balance sheets of the European banks. This is a unique opportunity for banks to focus investors’ attention on banks’ long-term strategies for profit growth and thereby continue the rerating of the European banking sector.”